• Maryland Expands Options for Changing Business Entity Form
  • February 14, 2014 | Author: David E. Kay
  • Law Firm: Lerch, Early & Brewer, Chartered - Bethesda Office
  • Maryland instituted a new law in October 2013 that allows most types of Maryland business entities to convert into a different type of Maryland entity, or even a different type of entity in another state. The statute also creates a new, easier way for entities formed in other states to become Maryland business entities. For example, a business originally formed as a limited liability company in Delaware can convert to become a Maryland corporation. 

    Previously, Maryland law only authorized such direct conversions in very limited circumstances when a sole proprietorship or partnership converted to become a limited liability company. Other types of conversions required the business owner to engage in a more complex merger, asset transfer, or other reorganization device that typically required the formation of a new and distinct entity. That alternative can be problematic for a variety of reasons, including when licenses, permits, or registrations are issued to the original entity, or if the entity is a party to contracts containing change of control restrictions covering mergers or asset transfers. 

    The new law provides a simpler, more streamlined process and, unlike the “surviving entity” in a merger, the converted entity is deemed the same entity, only in a different form. Upon a conversion under the new law, all assets and rights of the converting entity vest automatically in the converted entity, and the converted entity is liable for all pre-conversion debts and obligations of the converting entity. Additionally, conversion does not invalidate or terminate licenses, permits, or registrations; it does not affect pending litigation; nor does it impair rights of creditors or liens on property of the converting entity. Even with the new law, a converted entity with significant assets, such as real estate, may still want to take additional steps to ensure that its continued ownership of those assets is clear in the chain of title. 

    An entity can convert to a new form of entity in Maryland by filing articles of conversion, together with whatever type of formation document is required for the new form of entity, with the State Department of Assessments and Taxation. Owners of the converting entity must approve the proposed conversion under procedures similar to those now required for mergers. 

    Conversion can be appealing to a company seeking to change its status for tax purposes, take advantage of certain benefits only available to a different form of entity, attract venture capital, obtain legal liability protection, or modify its management or governance provisions. Depending on the circumstances, conversions can have adverse or positive tax consequences. Gaining an understanding of the tax implications for your entity is an essential step to determine whether and how to convert.